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For nearly two years, the Law Commission has been considering if and how to reform English law to recognise and protect digital assets. The result is an epic 549 page Consultation Paper and, for those of a less strong constitution, an accompanying 20 page Summary document, both published on 28 July 2022. Linklaters was one of the few law firms that were consulted in the course of the paper being produced.
The Law Commission suggests that, while English law has demonstrated a degree of flexibility in accommodating the use of digital assets, now is the time to develop a coherent legal framework capable of dealing with all manner of digital assets.
The proposal is grand, and for IP and technology lawyers exciting: the Law Commission proposes a brand-new asset class that carries with it far-reaching opportunities for IP exploitation.
The Law Commission says that under English law, two categories of property rights are currently recognised:
The Law Commission concludes that digital assets do not fit neatly into either category. Its proposal is to recognise a new class of digital assets which satisfy the following criteria:
Categorising things as property can be significant, for example, in terms of enforcement of rights against third parties, priority treatment in insolvency, transmissibility of rights, and grabbing back assets you seem to have lost.
The paper analyses different types of assets and opines on whether they satisfy the three criteria above. The analysis is helpful not just in the context of digital assets, but in support of many of the things we’ve known for some time, but now with the benefit of added learned analysis. It notes that:
NFTs (non-fungible tokens) are distributed ledger-based tokens that certify the uniqueness of an underlying digital asset. Much has been written about how NFTs can be protected by IP rights, such as trade marks, copyright and how certain related technologies may be patentable. However the bigger IP story is about how brands are going to use NFTs to fractionalise (i.e., break down into pieces and exploit) the IP rights they own.
Imagine a music production company that owns rights to all the Beatles’ IP rights. They could license the minting of 1000 pairs of John Lennon branded sunglasses. Those thousand pairs of sunglasses satisfy the three limbs required for a digital asset as described above (they are composed of data; exist independently; and are rivalrous). Avatars could wear those sunglasses in the metaverse. More importantly the music production company might decide to put on a concert, performed by a John Lennon avatar only for members of the public wearing those sunglasses. Ownership of those sunglasses therefore becomes valuable and can be traded between individuals. The NFT might be programmed so that on each transfer a portion of the sale price goes back to the production company. Imagine the same marketing strategy applied a hundred times over to other virtual assets (or modified versions of the same assets) which carry with them the benefits of exclusive access to user communities, to events or the rights to use certain IP rights.
Digital assets continue to grow in importance and challenge many aspects of conventional legal systems, including the laws of personal property. The Law Commission paper notes that while English law is in many ways sufficiently resilient, flexible and iterative to accommodate digital assets, legal reform is necessary to acknowledge the nuanced features of digital assets and to reinforce the strength of the digital assets environment. Change is coming and anyone with an interest in creating or exploiting IP now needs to take account of the new opportunities that will be presented in the context of dealing with IP in a digital asset world.
The Law Commission is seeking consultation responses by Friday 4 November 2022.
5 August 2022
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